Shifting Regulations and Market Turmoil: Navigating the Legal Landscape of Food Inflation in the UK
In the wake of major financial turmoil caused by surging energy prices, the United Kingdom finds itself grappling with a pressing issue: soaring food inflation. As the dust settles on the energy crisis, the nation now faces a potential wave of regulatory and legislative changes, driven by the powerful interplay of macroeconomic factors and shifting market trends in consumer prices.
Due to the Russia-Ukraine conflict, Europe has increasingly moved to reduce its dependence on Russian gas, as a result increasing the cost of the vast amounts of energy needed to produce and transport food. As a consequence, consumers bear the brunt of this situation through escalated prices. However, even as high commodity and energy prices have loosened, food inflation continues to remain high.
In the UK, the cost of food continues to increase, with prices being 19 percent higher than a year ago, more than double the overall inflation rate. While food prices in the EU are 16.6 per cent higher in April as compared to the start.
Reasons for Food Inflation in the UK :
The most obvious suspect is “greedflation” where supermarkets are accused of attempting to pocket wider profit margins with wholesale prices falling. However, such accusations are unjustified in UK food markets, as their recent profit margins are within their historical range. While UK supermarkets, such as Sainsbury's and Tesco, have not been responsible for excessive profit margins, the rising food prices can be attributed to external factors.
One major factor is Brexit and the trade barriers that emerged when the UK left the EU and its single market. The tight regulatory controls and increased time and cost for perishable shipments have contributed significantly to the rise in UK food prices, with nearly one-third of the increase since the end of 2019 linked to new trade barriers. Research by the London School of Economics suggests that nearly a third of the rise in UK food prices since the end of 2019 can be attributed to these new trade barriers.
The rise of new trade barriers has generated new clients for law firms to resolve supply chain issues caused by Brexit as well as the pandemic, to provide advice on various issues such as effective breach of contracts.
Secondly, global context plays a significant role in the current food inflation scenario. During Russia's invasion of Ukraine, food commodity prices skyrocketed due to the energy price shocks and the Russian theft and blockade of Ukrainian food exports. This has caused a domino effect in the supply chain further impacting food inflation.
Further impediments such as sanctions and potential competition issues, caused due to a blockade of Ukrainian food exports, have driven clients across the supply chain to law firms to seek advice on addressing contractual issues and mitigating potential disputes.
Measures to Address Food Inflation
The UK government, led by Rishi Sunak, is reportedly planning to ask retailers to voluntarily cap prices as opposed to imposing caps. This proposal aims to control and stabilise food prices to ensure affordability for all citizens. Additionally, the cross-party Environment, Food and Rural Affairs (EFRA) Committee of the House of Commons, will be examining how profits and risks are shared from "farm to fork", and the level of regulation. It will also examine the impact of external factors on the supply chain, such as imported food and global commodity prices.
Law firms play a crucial role in advising clients across the food supply chain. As regulations evolve, legal professionals must stay updated and guide clients regarding compliance and potential contractual issues. With the possibility of price controls and fluctuating profit margins, law firms may also need to address contractual breaches and disputes within the supply chain.
With no substantial change in food inflation, the findings of EFRA may spur new regulations and measures to stave off inflation. One such measure has been the rising interest rates, where the Bank of England raised its base interest rate to 4.5%.
The decrease in inflation has been slower than expected with the decrease to 8.7 per cent from 10.1 per cent in the previous month, boosting expectations that it could hit 5% by the autumn to curb inflation.
Corporate profits are being scrutinised post allegations of “greedflation”, with supermarket profits slipping in the first quarter, with several prominent firms saying they have offset the majority of input cost increases. Tesco, even as a market leader, has an operating margin of 3.9 per cent in the UK and Ireland in the first six months of the year and costs have escalated further since then.
Lower operating margins coupled with higher interest rates will make it more challenging for supermarket giants to meet their debt obligations, and to make repayments, potentially leading to insolvency or bankruptcy. For law firms with strong restructuring and insolvency practices, this presents an opportunity for significant revenue growth.
There is an increased risk of disputes with suppliers, such as the chairman of Tesco accusing certain food firms of profiteering from inflation in order to protect their own margins and cutting ties with some of its suppliers over the issue. This may lead to an increase in litigations and disputes handled by law firms over contractual issues as well as employment issues with companies laying off employees to cut costs and combat reduced margins.
Contractual issues arise when some stakeholders in the food supply chain attempt to maximise their profit margins despite falling wholesale prices. Law firms must assist their clients in navigating these challenges and ensuring fair practices throughout the supply chain. Scrutiny, moral suasion, and policy intervention may be required to maintain market stability and protect the interests of all stakeholders involved.
A recent example would be the dispute between Kraft Heinz and Tesco and between Mars Pet products and Tesco where the supermarket pulled the respective products off their shelves when their prices were raised. Ultimately Tesco and Kraft Heinz reached a mutual agreement, however, such disputes have become increasingly common with a higher need for dispute resolution and termination of supply contracts.
Disputes amongst supermarkets have also increased with higher competition, as more recently Bird & Bird successfully represented Lidl in a lawsuit against Tesco. Allowing Lidl to potentially seek a share of any profit made by rival Tesco from its Clubcard discount scheme as a result of copying Lidl's logo. This has allowed a supermarket to unconventionally cover the losses driven by food inflation.
Final thoughts
As food price swings are expected to intensify, the future of markets especially the non-alcoholic food and drinks market have replaced energy and commodity prices as the main concern for inflation.
Food inflation remains a significant concern in the UK, to address this issue, governments must consider changing regulations and propose measures such as voluntary price caps and targeted direct support, the UK may also witness a spur of new laws in finance similar to The Inflation Reduction Act adopted by the United States.
Hence, it is crucial for governments, businesses, and legal professionals to collaborate and prepare for the challenges ahead. Law firms have a vital role to play in advising clients across the food supply chain, ensuring compliance, addressing contractual issues, and mitigating potential disputes amid uncertainty in the future of markets.
By Rishit Singh, London Headlines